Oil dropped below $40 a barrel yesterday as a weakening global economy overshadowed Opec's attempts to curb crude supply and boost prices.
US non-farm payrolls numbers due at 1330 GMT are expected to add to the gloom, after data released the previous day showed applications for US jobless benefits hit a 26-year high.
US light crude for March delivery fell $1.25 to $39.92 a barrel by 1228 GMT, while London Brent, which usually trades below its US counterpart, fell 71 cents to $45.75. US crude is trading well below Brent as inventories in Cushing, Oklahoma – the delivery point for the US crude contract – are at record levels. US crude for delivery in two months time is trading just under $45 a barrel. The head of Italy's largest oil company predicted yesterday that oil could stay as low as $40 for the rest of 2009.
That level is too low for members of the Organisation of the Petroleum Exporting Countries (Opec) to generate enough revenue or encourage investment in new supply. In a bid to boost prices, Opec agreed to cut a further 2.2 million barrels per day (bpd) from January. The reduction comes on top of curbs of 2 million bpd in place since September.
Opec sources have indicated the group could cut a further 1 million bpd from output when it next meets on March 15.
"These are significant output cuts and if they can implement more then we should see global stock cover start to come down.," said Julian Keites at Newedge.